Rural Taobao: Alibaba’s Expansion into Rural ECommerce
Weeks after being appointed to his new position in 2017, Bill Wang, vice president of Alibaba
Group and general manager of the Rural Taobao initiative, still hadn’t had a chance to settle into his
new Hangzhou office. In a van with other top managers and his boss, Trudy Dai, he munched on a
hamburger as they mulled over ways to present the initiative’s position within Alibaba’s corporate
strategy. It was a critical moment for Rural Taobao. Launched by Alibaba in 2014, Rural Taobao was
an initiative designed to bring hundreds of millions of rural villagers into the growing sphere of
Chinese e-commerce. After achieving initial growth and the accumulation of large investment,
extensive media coverage, and enthusiastic support from local and central governments, the initiative
needed to identify a sustainable business model. It was up to Wang to bring a new set of eyes to the
initiative, to evaluate the current model, and to kick-start its revitalization.
During his 17-year tenure at Alibaba, Wang had worn many different hats: from technician, to
product manager, to the lead developer of data center infrastructure. In his history with the company,
he had developed a reputation for reliability, a deep understanding of Alibaba’s organization, and
unparalleled knowledge of e-commerce infrastructure--- all of which made him an ideal candidate to
lead the next phase of Rural Taobao’s growth.
For Bill Wang, Rural Taobao was his most exciting and challenging assignment yet. The initiative
lay at the heart of Alibaba’s commitment to improving the quality of life for rural Chinese citizens by
creating an ecosystem in which they could buy and sell goods online. It also represented an enormous
growth opportunity; with more than half a billion potential consumers, China’s countryside was a vast
and largely untapped market. But the initiative had encountered some roadblocks. As Wang explained:
“From the beginning, the goal of the initiative has been to ‘create social good through a commercial
approach.’ Of course, we are a business, and we can certainly make money if we do well. But the core
issue is still about helping the countryside. Our motivation for public welfare was already there. We
needed to figure out the best approach.”
Initially, Rural Taobao had established “village stations” in local convenience stores to serve as
logistical nodes and portals to e-commerce. It was believed that shop owners would act as local
intermediaries who could educate rural citizens on the basics of buying and selling online. But within
a few months it became apparent that shop owners were ineffective at expanding adoption. So, Alibaba
shifted their strategy to partnering with young “returnees” (locals who returned to their villages after
having lived in cities) who had a vested interest in the prosperity of their local communities. While the
initiative had achieved some success in its public service mission, it had yet to identify a financially
sustainable model. Furthermore, Rural Taobao faced increasing competitive pressures from rival ecommerce firms.
Choosing the right business model involved a balancing act between building trust with rural
consumers, controlling user experience, containing costs, and competing against rivals. Moreover,
while Wang had to consider the company’s bottom line, he also had to continue to uphold Alibaba’s
objective of fostering rural development. This was a goal shared by China’s local and central
governments and was a key factor in their willingness to support the company’s ambitions in the
countryside.
Despite these challenges, there was no limit to the team’s aspirations. As Wang put it: “The reason
we are targeting the rural areas is simple: internet enables the rapid increase and diversification of
consumption. Rural areas are the places that will benefit most from the internet. And this is true not
only of China. Ultimately, we hope that China’s Rural Taobao can become Rural Taobao for the world.”
China’s Urban-Rural Divide
Forty years ago, China was a poor agricultural country with 80 percent of its population living in
rural areas and more than 250 million citizens existing below the official poverty line. 1 But beginning
in 1978, when Deng Xiaoping initiated “Reform and Opening Up,” China’s socialist economy started
down a path of structural transformation. Rural households, previously organized into People’s
Communes, were allowed to farm their own plots of land and produce goods to sell on open markets.
Villages and townships were encouraged to pool their capital to open new factories and enterprises.
Special Economic Zones like Shenzhen and Zhuhai were created to attract foreign direct investment.
These capitalist reforms translated into historically unprecedented growth: between 1978 and 1998,
China’s GDP increased almost tenfold; over the next twenty years, it increased tenfold again. By 2018,
China had become a middle-income country and the world’s second largest economy.
But as Chinese society grew wealthier, it also became increasingly unequal. Government policies
that favored industrialization caused urban economies to grow much faster than those in the
countryside. Rural migrant laborers abandoned agriculture to seek opportunities in the cities and remit
wages back to their families. However, because of structural barriers to urban citizenship, such as the
household registration (hukou) system that prevented migrants from changing their residency, rural
citizens were excluded from many entitlements enjoyed by their urban counterparts. Consequently,
over the past forty years, the growth of per capita disposable income for urban households consistently
outpaced that of rural households (see Exhibit 1). Chinese society was split by a widening urban-rural
divide.
Beginning in the early 2000s, in an effort to turn the rising tide of economic inequality, the State
Council began investing heavily in China’s impoverished western regions and rural interior.
Agricultural taxes were abolished to help to lift rural incomes. New roads and bridges were built to
link villages with towns and cities and enhance rural mobility. In five years, the total length of railway
lines was increased by 17,000 miles, and roads by 330,000 miles. 2 Cellular broadband networks were
expanded to include even sparsely populated and remote regions, pushing up rural internet usage
from just 53 million in 2007 to 209 million in 2017.3 Collectively, these initiatives created unprecedented
economic opportunities in the Chinese countryside and helped raise rural per-capita income from
$1500 in 2010 to $3000 by 2015 (see Exhibit 1). But perhaps in no area was the pace of change more
rapid than in the development of rural e-commerce.
The Rise of Rural E-Commerce
Beginning in the mid-2000’s, e-commerce began reshaping local economies in the rural Chinese
countryside. Dongfeng, a small farming community in Jiangsu Province, became China’s first village
to engage in large-scale e-commerce. In 2007, Sun Han, a 30-year-old native, quit his job in the city and
returned home to become an entrepreneur. With two thousand yuan in capital and the village’s first
Internet-enabled computer, Sun launched an online retail business selling small shavers and lighters.
The following year, after visiting an IKEA store in Shanghai, Sun was inspired to launch his own
furniture shop on Taobao. Partnering with a local carpenter, Sun began producing different types of
low-cost furniture. The furniture proved popular, and soon the duo was rushing to fulfill dozens of
orders each day. After getting wind of Sun’s success, neighbors began setting up online furniture shops
of their own. By the start of 2009, e-commerce businesses were opening in the area at the rate of one
new store per day. By 2014, there were over 3000 online Taobao sellers based in and around Dongfeng
Village, which came to control 65 percent of all furniture sales on Taobao. 4 The entire local economy
had been recreated within the ecosystem of e-commerce.
Around the same time as rural producers began selling goods through online shops, rural
consumers also began buying goods online. Between 2008 and 2015, the percentage of rural netizens
(citizens already using the internet) that engaged in online shopping increased from just over 15
percent to more than 47 percent. 5 As internet penetration continues to rise in rural areas, the
expectation was that more and more rural residents could access a wider array of goods at lower prices
on platforms such as Taobao.
The consumption power of rural citizens was also on the rise. Between 2012 and 2016, rural
residents experienced a 36 percent rise in disposable income. 6 This upward trend was driven in part
by the increasing number of migrant workers who were leaving cities with high costs of living in favor
of towns and villages where their incomes could be stretched much farther.
As a result of rising incomes and rising usership, between 2014 and 2015, China’s rural online
shopping market grew from about USD $20 billion to over $50 billion, a 94.3 percent year on year
increase. 7 By 2017 rural online transactions exceeded $130 billion ($19 billion of which came from
China’s most impoverished rural counties). 8 A 2016 report by the Fung Business Intelligence Group
predicted that within one to two decades, the transaction value of China’s rural e-commerce market
would surpass that of urban areas.
Challenges of Rural E-Commerce
In early 2016, Alibaba’s CEO, Daniel Zhang, announced that rural e-commerce was the key
battleground for the future of the company. After over a decade of explosive growth, China’s urban ecommerce market was nearing saturation.9
To expand e-commerce to the rest of China and help rural consumers transact online, Alibaba
would need to overcome major obstacles with rural internet access, logistics, and trust. First was the
problem of internet access. In 2016, rural internet penetration hovered around 30 percent, less than half
that of urban areas (see Exhibit 2). To shrink the “digital divide” between the cities and the countryside,
China’s State Council had earmarked $322 billion to bring broadband coverage to 98% of China’s
registered poor villages by 2020. 10 Though several major public private partnerships had been
established to carry out this goal (such as a contract with China Unicom to install 100 Mbps cable
service to schools in rural areas), by the end of 2017, nearly 500 million Chinese citizens remained
offline.11
Underdeveloped logistics also slowed rural e-commerce growth. In 2015 only 48 percent of Chinese
towns and villages were covered by express delivery networks. 12 While it was relatively easy to ship
goods to county seats, poor road conditions and challenging terrain made it far more difficult to deliver
items to the “last mile” in the surrounding countryside. One Alibaba-affiliated courier in Northwest
China regularly spent 9 hours delivering 200 packages along a route that spanned 200 miles of
treacherous roads on which he could drive no more than 40 mph. 13 Such poor rural infrastructure
drove up shipping costs and inhibited the fast delivery of goods.
In addition to the cost of infrastructural expansion, there were major cultural barriers to adopting
e-commerce in rural areas. Compared to urban consumers, rural residents exhibited low levels of trust
in market transactions. The pervasiveness of fake products in the countryside and rampant information
asymmetries made rural consumers wary of exploitation. Because of these institutional voids, rural
consumers tended to rely upon interpersonal networks and face-to-face exchange. These ingrained
practices prevented rural consumers from accepting the idea of buying from anonymous sellers online.
Moreover, a high degree of technological illiteracy among the older generations further exacerbated
the problem. Bill Wang explained:
People in the countryside have no way of getting products of the same quality at the
same price as in the cities. Urban consumers don’t need to know how to distinguish the
quality of the goods or determine whether or not something is fake, because there are
developed monitoring systems in place and everyone knows how to play by the rules.
Rural areas lack this. Every businessman is out for himself. This is the current state of
China.14
Despite the challenges of doing e-commerce in rural regions, the potential for growth was
enormous: almost half of China’s population had yet to begin participating in e-commerce. Moreover,
China’s central government promised to offer their support. High-ranking party leaders like Premier
Li Keqiang viewed the spread of internet technologies and development of e-commerce as a means of
“digitally empowering” poor communities that would otherwise require state aid. 15 Under the
influence of such leaders, in 2014 the State Council made the development of rural e-commerce an
official part of its anti-poverty strategy. According to a public document the state would actively
“encourage large-scale e-commerce platform enterprises to carry out rural e-commerce services and
support local and industry-sound rural e-commerce service systems.” For Alibaba and competitors,
this was a clear signal that the countryside was ripe for expansion.
Alibaba and Taobao
Alibaba’s history began in 1999 when Jack Ma and 17 others founded Alibaba.com, a business-tobusiness (B2B) marketplace platform. Within two years the company became profitable and had
achieved massive transaction volumes by connecting Chinese suppliers with domestic and global
retailers. In 2003, Alibaba launched Taobao, a consumer-to-consumer (C2C) platform. According to
Jack Ma, Taobao was created to defend against the encroachment Alibaba’s major e-commerce rival,
eBay. Unlike eBay, Taobao generated its revenue from advertisements rather than taking a cut from
each merchant transaction. Moreover, the platform was designed specifically for the Chinese market
and included localized features, such as a direct personal chat interface that allowed buyers to easily
communicate and negotiate with sellers. Taobao’s model proved enormously successful. Within two
years, it had displaced eBay as China’s leading online marketplace. By 2006 eBay was forced to
withdraw completely. Pundits attributed Taobao’s success to Alibaba’s deeper understanding of
China’s markets and Chinese consumers.16
After a period of tremendous expansion, in June 2011, Alibaba split Taobao into three distinct
platforms: Taobao Marketplace (a C2C portal), Tmall (a B2C portal for retailers), and eTao (a shopping
search engine). Each of these platforms quickly came to dominate their respective market segments
and further fueled the growth of Alibaba. By March 2013, over 60% of the parcels delivered in China
were coordinated by Alibaba’s digital platforms.17 By 2014, Alibaba Group controlled 80% of China’s
online sales and was generating $7 billion dollars in annual revenue. 18 In September of that year, the
company broke records when it launched the largest ever global IPO, raising $25 billion on the New
York Stock Exchange (see Exhibit 3 for Alibaba financials).19
But with such tremendous growth, there came also an increasing pressure to find new areas for
expansion. With a gradual saturation of urban online markets (see Exhibit 4 for overall rates of
consumer marketplace growth), Alibaba Group sought to build new divisions and acquire companies
outside of its traditional e-commerce business. For example, in 2013 Alibaba launched Cainiao, a
platform that provided sellers with in-house logistics services.20 The corporation also created other
ventures in areas as diverse as cloud computing, marketing, and financial services (See Exhibit 5 for
summaries of Alibaba group’s main subsidiaries). Yet, despite the relative success of these non-core
businesses, by 2017, only about 10% of Alibaba’s revenue came from businesses outside of e-commerce.
Leaders in Alibaba recognized the importance of capturing the one major untapped market for ecommerce in China: rural areas.
Alibaba’s Rural Taobao Initiative
To achieve greater e-commerce penetration in rural areas and expand its non-urban user base, in
September 2014 Alibaba launched a series of projects and operations under the umbrella of the “Rural
Taobao Initiative.” At the heart of the initiative was the $1.5 billion flagship project called “A Thousand
Counties and Ten Thousand Villages,” which aimed to build a massive network of village-level ecommerce stations and county-level e-commerce centers across the Chinese countryside. 21 The project
was launched with the ambitious goal of establishing a direct presence in 100,000 (out of China’s
600,000 total) villages by 2019.22
Rural Taobao was one of the “eight armies” of Alibaba’s new retail strategy. The group consisted
of several hundred internal employees (about 1,000 by the end of 2017) who operated as independent
group within the company.23 As the new general manager of Rural Taobao, Bill Wang was also a Vice
President of Alibaba Group, and directly reported to the President of the Business Services group
Trudy Dai (see Exhibit 6 for a stylized organizational chart). Wang and Dai had known each other for
almost two decades and had a friendly and collaborative relationship. Dai was one of the eighteen cofounders of Alibaba – the famous “Eighteen Arhats” of 1999, and Bill was one of the company’s first
hired engineers. Dai often reminisced about her days eating instant noodles in Jack Ma’s apartment in
Hangzhou. When it came to Rural Taobao and Wang’s work, Dai offered a supportive role, especially
in terms of providing him with the requisite personnel. Wang liked to say he did not really “report” to
Dai in the traditional sense of the word; rather, he would discuss long-term visions of Rural Taobao
and bounce ideas off of her.
Unlike Tmall and eTao, Rural Taobao was not spun out as a separate marketplace platform.
Instead, its mission was to develop infrastructure and resources to encourage rural buyers and sellers
to use the existing Taobao platform. Occasionally Wang had to interface with the heads of other
departments: Jiang Fan of Taobao, Jing Jie of Tmall, and Wan Lin of Cainiao Logistics. Among the
department heads the most common discussion topics revolved around infrastructure; for example
whether Rural Taobao could benefit from another department’s provision of software services,
hardware, or logistical support. However, for the most part Rural Taobao was an independent unit.
This modular organizational structure was intended to create minimal confusion and overlap between
departments.
Alibaba’s management hoped that the establishment of village stations would provide the
infrastructural basis around which rural consumers would develop a habit of online shopping. At the
same time, Rural Taobao was also part of a larger effort to explicitly align Alibaba’s goals with those
of the central government, namely using e-commerce as a tool for alleviating poverty in rural China.
In Wang’s words: “Our mission is clear: We want to improve the living conditions of China’s rural
regions. To do so, we need to provide high-quality goods, personalized services, smart logistic
solutions, and prices comparable to that of cities.” However, while Rural Taobao might have been
billed as a public service initiative, it was important that it become a financially sustainable business.
Rural Taobao 1.0
“Rural Taobao 1.0,” or “1.0” for short, was launched with the goal of establishing gateways to ecommerce throughout the countryside and familiarizing rural citizens with the process of buying and
selling goods online. In order to address the challenges of limited internet connectivity, limited
proficiency, and logistical costs, the Rural Taobao team decided to create “village stations” by
collaborating with local convenience stores. 24 In this first version of the initiative, Alibaba had two
objectives for the village stations. First, the stations were meant to give rural sellers the resources they
needed to grow a business online. Second, and perhaps more importantly to the financial sustainability
of the venture, the stations would make purchasing goods online more accessible for rural consumers.
To select sites for these stations, Alibaba staff canvassed shops throughout the countryside and
personally interviewed store owners for the position of local “station chiefs” (zhanzhang). Successful
candidates were chosen on the basis of their educational backgrounds, expressed interest in ecommerce, and the location and popularity of their convenience stores. After being selected, each
village station was equipped with broadband internet access and a flat-screen TV for villagers to
browse products (for photos of example village stations, see Exhibit 7).
Station chiefs were meant to act as ambassadors of e-commerce who would create a friendly,
interpersonal environment in which villagers could learn to trust online transactions. The station chiefs
were also trained in the basics of e-commerce, including how to submit an order, how to communicate
with buyers and sellers, and how to interface with Alibaba staff to resolve technological or human
issues. Each station chief was compensated with commission (tiered based on product category, on
average around 5%) based on the value of purchases made by locals in their village. 25
Each station also served as a logistical node for package delivery and drop-off, thereby reducing
last-mile shipping costs.26 Because Alibaba did not operate its own logistics network in the countryside,
they contracted local logistics companies to ship to village stations at an average cost of 2.5 RMB
(roughly 35 cents) per transaction, which was included in the order price. 27 Station chiefs were
responsible for ensuring the final delivery from the station to the consumer.
According to Lijun Sun, the first general manager of Rural Taobao (Bill Wang’s predecessor), 1.0
was an exploratory phase run on a “trial and error” basis. 28 And indeed, during the implementation of
rural service centers errors abounded. Alibaba found it difficult to align the incentives of the part-time
village station chiefs with those of the platforms. Though they had been recruited by Alibaba to
promote e-commerce among their fellow villagers, they remained independent business owners
running their own shop (Exhibit 7). This dual identity resulted in a number of conflicts.
For many chiefs, encouraging customers to shop online cannibalized their existing business.
Villagers often visited local shops to purchase things like phone chargers and toothpaste which could
usually be bought online at a 20% lower price. 29 Moreover, although station chiefs were given a
financial incentive to facilitate direct sales, they were given no corresponding incentives to provide
other offline services. For instance, a station chief might not educate new online shoppers on how to
lodge a complaint with a seller or how to dispute a defective or fake product. Such value-added services
might have significantly improved the rural customer experience.
Despite investing about $20 million in the creation of 4,000 village stations, by the first quarter of
2015 it appeared that the “1.0” was ready for an upgrade. 30 Each station chief was, on average,
facilitating only 70 transactions per month, with average order sizes of around $30. Meanwhile,
monthly variable costs at each station including commissions, logistic subsidies, marketing, and
maintenance totaled about $400. In their meetings, managers at Rural Taobao agreed that there was
ample room for improvement in both revenue growth and cost saving.
Rural Taobao 2.0
In May 2015, Alibaba transitioned to the second phase of the Rural Taobao initiative, dubbed “2.0.”
To remedy the problems encountered in the first phase, the company pivoted away from the part-time
station chief system and towards a full-time partnership model. As part of this new effort, Alibaba
launched a series of TV broadcasts and ads calling for “Partners for Rural Taobao!” 31 The media
campaign targeted young “returnees,” individuals who had lived in the cities and experienced urban
e-commerce, but who had returned home to explore economic opportunities in the countryside.
Alibaba employed these new Rural Taobao “partners” (hehuoren) as full-time promoters of ecommerce.32
The Rural Taobao team believed that the interests of returnees were better aligned with those of
the company. Many of the recruited partners were educated youths who had left more lucrative jobs
in the cities for an opportunity to return to their home communities. 33 These individuals had intimate
knowledge of local customs and conditions and a powerful vested interest in the development of their
villages, making them more likely to actively spread the adoption of e-commerce.
Rather than being asked to work in existing convenience stores, in 2.0 Rural Taobao partners were
stationed in dedicated commercial spaces, funded by the local county government and outfitted by
Alibaba. Partners received in-person training by Alibaba representatives once a year, as well as
additional remote training through online programs. Like station chiefs, partners continued to be
compensated through commissions, which equaled on average 5% of every facilitated purchase. 34 But
unlike chiefs who had to also manage their own stores, partners were free to focus all of their energies
on e-commerce. To create a better customer experience, they were also expected to perform additional
services such as delivering packages and assisting customers with returns.
The recruitment of full-time partners proved a more effective model than the use of part-time
station chiefs. Phase 2.0 was unrolled rapidly; by the end of 2016 Rural Taobao had expanded to include
almost 30,000 partners working out of 17,000 stations. After the shift to 2.0, the average number of
villagers serviced per village station increased by 10% relative to 1.0, and average transactions per
partner increased from 70 to about 250 per month. 35 With average purchases of $30 per order, partners
were generating about $2.7 billion in GMV. But this growth came at a cost. By the end of 2016 Alibaba
had spent over $150 million in fixed costs, and total monthly variable costs came out to around $950
per station including logistics subsidies and commissions. a
Corporate profits and losses aside, there were also measurable gains to the villagers’ welfare.
According to a study led by Berkeley and Stanford economists, the average welfare gains of a village
station was about $26,000 per village, which were largely attributable to reduced prices and increased
product variety.36
However, a number of problems remained unsolved with the 2.0 model. Despite a 23% increase in
retention of partners relative to the station chiefs in 1.0, the income from commissions was sometimes
too small to retain the services of talented partners. The average partner earned around $350 per month,
a Fixed and variable cost estimates based on company reports, the author’s observations and conversations with partners and
employees. Total fixed cost estimates are $8500 for each new station, including furnishing, marketing, Internet and TV
installation, computer, recruiting, and initial training. Total variable costs based off 5% commission, 5% logistics subsidy, and
around $200 for ongoing training, communication, IT support, internet, and marketing
a figure that far exceeded the average monthly income for rural residents ($150), but remained well
below what an educated youth might expect to earn through urban employment (closer to $1500).37,38
Although many partners came to the countryside out of enthusiasm to rejoin their local communities,
practical financial considerations ultimately resulted in many going back to their city jobs. One partner
shared that he started out with the best of intentions: “From my tiny shop in my hometown of
Yongning, in eastern China’s Anhui province, I felt convinced that I’d finally be bringing the
convenience of online buying and selling to my hardworking but downtrodden fellow villagers…. I
didn’t just want my outlet to be some kind of workshop for internet sellers; I wanted it to become a real
community hub. To this end, I offered free snacks to passersby and put on movies for people in the
evenings. I built a book corner for the kids at the middle school across the street and covered the
delivery fees for farmers who requested exchanges or refunds... A local trader would roll up on his
motorbike, shout… ‘Get me 200 pairs of those gloves!’ and ride off, knowing I’d get the kind he
wanted…” But before long he began to feel like staying a partner didn’t make financial sense: “I made
just over 30,000 yuan ($4,400) from my outlet last year… Outlet shopkeepers work so hard and earn so
little that before long, we all move on to greener pastures.” 39
Another enduring issue was the continued misalignment of partner incentives. In order to
maximize their commission-based income, many partners developed a myopic focus on increasing
sales volume, sometimes at the expense of serving the local community. For example, although the
partners were expected to deliver packages to customers’ homes, they would often keep the goods at
the stations for pickup in order to save time and energy. Moreover, although partners were trained to
service products and assist with returns, there was no explicit incentive to do so. These factors became
increasingly problematic as rural consumers were presented with options from Alibaba’s rising
competitors like JD and Pinduoduo.
Jingdong (JD)
Since the early years of e-commerce in China, Alibaba had faced its greatest competition from a
single major competitor: Jingdong (JD). Founded in 1998, JD was an integrated B2C platform that
functioned both as a retailer that sold directly to consumers and as an intermediary that connected
buyers with third-party sellers. In other words, if Taobao was the eBay of China, then JD was the
Chinese Amazon.
Throughout their first decade of competition, Alibaba succeeded in holding JD at bay. In 2013 JD’s
Gross Merchandise Volume (GMV) was only about 12% of Alibaba’s and 51% of Tmall’s total online
consumer GMV (See Exhibit 4 and Exhibit 8 for Alibaba and JD GMV data).
By 2016 however, JD had made significant inroads into domestic markets; JD’s GMV had risen to
30% of Alibaba’s and 77% of Tmall’s GMV. According to the Analysys International Enfodesk, at the
end of the second quarter in 2017, JD had captured 32.9% of the Chinese e-commerce market, while
Alibaba retained controlled of 51.3%.40 While JD was still number two, it was gaining ground.
Although the majority of JD’s sales (like Alibaba’s) were derived from 1 st and 2nd tier cities (see
Exhibit 9), JD also saw the potential in China’s rural countryside. In 2014, around the time that Alibaba
launched the Rural Taobao initiative, JD formed a strategic alliance with Tencent, Alibaba’s rival tech
giant.41 The following year, Tencent acquired MMB, a small e-commerce platform with an active rural
user base and merged it with JD to bolster the company’s presence in the countryside. In 2016 JD also
began partnering with existing rural businesses in a strategy similar to the Rural Taobao 1.0 model.
Compared to Alibaba, JD’s physical presence remained small; in 2016 JD operated 1,700 stations
compared to Alibaba’s 22,000 service centers. However, JD’s stations were more specialized. They
focused on the sale and servicing of electrical appliances such as refrigerators and AC units that were
in low supply but high demand in rural areas. JD’s stations were also highly curated like storefront
displays that showed off “hot” items to prospective rural shoppers.
Unlike Alibaba, JD also operated its own logistics networks, which by 2018 employed 85,000
delivery personnel and controlled more than 200 warehouses and thousands of small supply depots. 42
In underserviced rural areas, JD Logistics proved a powerful asset. By operating their own network,
JD was able directly implement emerging logistics technologies and thereby offer more reliable and
cheaper delivery services. As early as January 2016, JD began testing drone-based deliveries with
machines that could reach a max speed of 45 mph and bear loads of up to thirty pounds. In 2017 the
company announced immediate plans to build 200 drone airports 43 with the ultimate goal of
establishing 10,000 drone airports for 24-hour delivery services across China. 44 In remote areas where
communities were separated by mountains and poorly maintained roads, drones presented a decisive
advantage over traditional truck-based delivery. By 2017, these investments helped JD achieve some
form of service coverage for about half of all rural villages in China. 45
Pinduoduo
Founded in 2015 by ex-Google engineer Colin Huang, Pinduoduo was a relatively late entrant into
Chinese e-commerce. However, the platform managed to find success in a saturated market by
employing a novel marketing strategy and focusing more narrowly on small cities and an older target
demographic (see Exhibit 9).
Unlike traditional e-commerce platforms. Pinduoduo aimed to create an interactive shopping
experience that integrated social networking. Instead of buying goods individually, users of
Pinduoduo purchased goods as groups. By integrating their service with China’s most popular social
networking app, WeChat, the Pinduoduo platform enabled users to invite their friends to form
shopping teams, and thereby secured group-rated discounts.46 The platform also doled out coupons
and offered flash deals for already low-priced items to drum up user excitement. This worked well in
tandem with social media, as users helped spread news of hot deals through their online networks.
Rather than compete directly with Taobao and JD by offering a wide selection of items, Pinduoduo
displayed only a small number of daily bulk deals on its platform (for a screenshot of Taobao and
Pinduoduo interfaces, see Exhibit 10). While this offered consumers fewer choices, it also encouraged
them to return to the platform to “hunt” for good deals and view items that they might not otherwise
consider purchasing. As one local expert explained:
Alibaba Taobao’s interface is search-based and centered on multiple product displays,
while Pinduoduo’s is more similar to a news feed and thus gives more exposure to a single
product and easy to create baokuan (viral items). Taobao has more products listed, but
Pinduoduo put its focus on fewer bestsellers that attract more buyers. 47
Pinduoduo's unusual social-shopping model became a viral success. The platform quickly
developed a loyal customer-base of formerly underserviced consumers in small cities and the rural
countryside. The integration with WeChat also provided a soft entry point to online shopping for the
hundreds of millions of Chinese who were already using the popular social media app, but had not yet
participated in e-commerce. Within two years of its founding, Pinduoduo surpassed 100 billion RMB
($14.7 billion) GMV, a milestone that had taken Taobao and JD five and ten years to accomplish,
respectively.48
The next model: Rural Taobao 3.0
In the face of intractable problems and mounting competitive pressure, Bill Wang took the reins of
the Rural Taobao initiative in early 2017. Wang knew he would have to learn from the experience of
models 1.0 and 2.0, as well as design a strategy capable of addressing new challenges presented by
domestic e-commerce rivals (Exhibit 11 compares the business models). If Alibaba failed to identify an
effective rural strategy, its rural business could be eclipsed by its fast-moving competitors in coming
years.
Internal discussion of next steps involved managers who approached the problem from many
different angles. Wang found that he had to balance managers’ specific needs with long-term strategy.
The head manager of sales and logistics channels, Honglei, argued that the team’s focus should be to
achieve the highest possible monthly growth to pique villagers’ interest. Wang saw Honglei’s logic,
but he also recognized that Rural Taobao was a long-term effort, the success of which should be on
factors more than month-to-month performance indicators. In his experience, it was difficult to
measure long-term success with short-term metrics. Meanwhile Benxiao, the head manager of local
services in Rural Taobao, insisted on outsourcing services such as delivery, assembly, and dispute
resolution to existing service providers operating at the county level. In light of the exorbitant cost of
nurturing and training local partners and Alibaba’s relative inexperience in rural operations, he argued
that it would be more efficient to rely on existing service providers for the fulfilling of service needs.
Other managers countered by emphasizing that Alibaba should be in control of the end product, which
they argued would be difficult if external providers were not motivated to serve the villagers with care.
These issues were far from resolved and were central to Wang’s considerations of Rural Taobao’s
business model in the next phase.
Conclusion
As Wang reflected on Rural Taobao’s history, he considered how the initiative had evolved over
time. At its inception in 2014, Rural Taobao had trumpeted its public service mission of helping rural
Chinese consumers catch up to urban standards of living. To date, Rural Taobao had employed about
60,000 employees in over 30,000 village stations. The stations were spread across nearly 800 counties,
about 500 of which were deemed “poverty counties” by the central government.
At the same time, rural China had also undergone radical changes. Since Rural Taobao’s launch in
2014, the transaction volume of rural e-commerce had grown dramatically. In 2017, online retail
shopping in rural areas reached $194 billion, up 39% from the previous year. 49 This growth greatly
surpassed previous estimates by the Ali Research Institute and forced Alibaba to reconsider the
strategic importance of Rural Taobao.
Going forward, what role would Rural Taobao play within the company? Would Bill Wang
recommit to providing high-touch service to villagers through local partners, or abandon the partner
scheme altogether for a completely new expansionary model? Were there elements of JD or
Pinduoduo’s strategies that he should emulate? If he chose a radically new model, how would it fit in
with Alibaba’s mission of public service and their relationship with the government? Wang knew he
only had two months to make the decision that could make or break Alibaba’s bid for rural China. But
as he and his team unloaded from the company van to present their emerging ideas to Alibaba’s
Eighteen Arhats, he didn’t feel nervous. He put aside his half-eaten hamburger and felt energized by
the challenge.
Exhibit 1
Income per household in Urban and Rural areas in China, 1978-2015
Household Income (USD)
$ 6 000
$ 5 000
$ 4 000
$ 3 000
$ 2 000
$ 1 000
1978
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$0
Year
Urban Households
Rural Households
Source:
Casewriters,
based
on
data
from
National
http://www.stats.gov.cn/tjsj/ndsj/2017/indexeh.htm.
Note:
Conversion rate of 1 RMB = .15 USD.
Exhibit 2
Bureau
of
Statistics
of
China,
Internet Penetration Rates in Urban and Rural Areas of China
Internet Penetration (%)
80%
70%
60%
50%
40%
30%
20%
10%
0%
2012
2013
2014
2015
2016
2017
Year
Urban Areas
Source:
Rural Areas
Casewriters, based on data from China Internet Network Information Center; http://b2b.toocle.com/detail-6419058.html.
Exhibit 3
Alibaba Revenue, 2013-2016
FY2013
FY2014
FY2015
FY2016
Revenue (millions of USD)
5,178
7,876
11,431
15,171
YoY%
72%
52%
45%
33%
China Commerce
4,375
6,770
9,441
12,648
YoY%
87%
55%
39%
34%
International Commerce
624
728
973
1,144
YoY%
10%
17%
34%
18%
Cloud computing and Internet Infrastructure
YoY%
98
116
191
453
26%
19%
64%
138%
Others
81
262
827
926
YoY%
400%
224%
215%
12%
Source:
Company annual reports.
Exhibit 4
Gross Merchandise Volume of Alibaba’s China Consumer Marketplaces, 2013-2016
FY2013
FY2014
FY2015
FY2016
Total GMV (billions of USD)
162
252
367
464
YoY%
62%
56%
46%
27%
38
76
127
182
Tmall GMV
YoY%
124%
100%
68%
43%
Taobao Marketplace GMV
124
176
240
282
YoY%
50%
42%
36%
18%
Source:
Company annual reports.
Note:
GMV is number of units sold multiplied by the price of each unit sold, not revenue to the company.
Exhibit 5
Core Divisions of Alibaba Group
Business Name
Industry
Relation
Description
Taobao
Marketplace
E-commerce
Subsidiary
Taobao Mall (Tmall)
E-commerce
Subsidiary
Alibaba.com
E-commerce
Subsidiary
1688.com
E-commerce
Subsidiary
AliExpress
E-commerce
Subsidiary
Alimama
Marketing
Subsidiary
Alibaba Cloud
Cloud
computing
Subsidiary
Cainiao Network
Logistics
Subsidiary
Ant Financial
Services Group
Finance
Affiliate
(33%
stake)
Consumer-to-consumer marketplace. Offers the
opportunity for individuals to open up online shops on its
website, taobao.com.
Business to consumer marketplace. Sellers must be
legal entities, such as an organization, an official
manufacturer, or a registered brand.
Wholesale marketplace for global trade. As of March
2017, buyers are located in more than 200 countries and
regions across the world, and are typically trade agents,
wholesalers, retailers, manufacturers, and SMEs (small
and medium-sized enterprises) engaged in the import
and export business.
Wholesale marketplace for domestic buyers. Connects
buyers and sellers in China who trade in general
merchandise, apparel, electronics, and raw materials,
among others.
Global retail marketplace. Allows consumers from
around the world, such as the US, Russia, and Brazil, to
buy directly from manufacturers and distributors in
China.
Marketing technology platform. Enables merchants and
brands to place various marketing formats on Alibaba
Group’s marketplaces.
Cloud computing arm. According to Gartner’s, Alibaba
Cloud is one of the world’s top three Infrastructure-as-aService providers.
Logistics data platform operator. Operates a logistics
data platform that leverages the capacity and capabilities
of logistics partners to fulfill transactions between
merchants and consumers at a large scale.
Includes Alipay, Ant Fortune, Zhima Credit, and Mybank.
Financial services provider focused on serving small and
micro enterprises and consumers. Spun off from Alibaba
in 2011.
Source:
Company website; https://www.alibabagroup.com/en/about/businesses.
Note:
Alibaba Group purchased the 33% direct equity stake in Alibaba in February 2018, which happens after the setting of
this case. Before then, Ant Financial had independently spun off from Alibaba in 2011 because of China’s rules
forbidding foreign ownership (Yahoo) of financial services providers.
Exhibit 6
Organizational Chart highlighting Rural Taobao position in Alibaba Group
Source:
Company documents.
Note:
This is a stylized simplified organizational chart that highlights how the position of Rural Taobao within the broader
group. Not all divisions of Alibaba are represented.
Exhibit 7
Photos of village stations in 1.0 model
Village station sign
Note:
Sign above (orange and green) advertises that this shop is a Rural Taobao station in Anchai village. Sign below
(maroon) advertises the name of the local convenience store.
Package pick-up at village station
Note:
Packages in foreground are Alibaba packages waiting for pickup. The boxes in the background are goods being sold
by the local convenience store.
Poster in village station explaining buying and selling process
Note:
The top flowchart (orange) explains the buying process, going through the partner to select and finalize a purchase. It
emphasizes that if the customer doesn’t like the product, it can be returned. The bottom flowchart (green) explains the
process of selling.
Source:
Casewriters.
Exhibit 8
JD Gross Merchandise Volume, 2013-2016
FY2013
GMV (billions of USD)
YoY%
20
FY2014
FY2015
FY2016
39
64
141
99%
63%
121%
Source:
Company annual reports.
Note:
GMV is number of units sold multiplied by the price of each unit sold, not revenue to the company.
Exhibit 9
Source:
Taobao, JD, and Pinduoduo user bases and average order value
Adapted by casewriters from TechCrunch “The incredible rise of Pinduoduo”, Jiguang Data, China Merchant Services,
Company Filings.
Exhibit 10
Source:
Shopping interface of Pinduoduo (left) and Taobao (right)
TechCrunch, “The incredible rise of Pinduoduo”; https://techcrunch.com/2018/07/26/the-incredible-rise-ofpinduoduo/.
Exhibit 11
Comparison of business models
Alibaba
Local
presence
Part-time village chiefs
JD
1.0
2.0
✓
✓
✓
Full-time partners
✓
✓
Advertising / social media focus
Local physical location
✓
✓
Primarily third party logistics operations
Source:
Casewriters.
✓
✓
Own logistics operations
Logistics
Pinduoduo
✓
✓
✓
Endnotes
1 The poverty line was set at 17 cents per day, well below international standards. Poverty Statistics in China, published by the
National Bureau of Statistics of China in September 2004.
2 China Federation of Logistics and Purchasing website, http://www.chinawuliu.com.cn/office/30/176/13283.shtml,
accessed July 2018.
3 CNNIC Reports that the growth rate of rural netizens is three times that of cities, http://tech.sina.com.cn/i/2008-04-
23/14052156958.shtml, accessed July 2018.
4 “How Taobao Alleviated Chinese countryside poverty”, https://dareasia.com/en/taobao-alleviated-chinese-countryside-
poverty/, accessed July 2018
5 Anthony H. F. Li, « E-commerce and Taobao Villages », China Perspectives [Online], 2017/3 | 2017, Online since 01
September 2017, connection on 12 October 2018. URL: http:// journals.openedition.org/chinaperspectives/7423.
6 Tech in Asia, “Video: How China’s tech titans are looking beyond big cities”, https://www.techinasia.com/china-rural-
ecommerce, accessed July 2018.
7 Deloitte, “China E-Retail Market Report 2016”,
https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/cip/deloitte-cn-cip-china-online-retail-market-report-en170123.pdf, accessed July 2018
8 People’s Daily, “E-commerce revitalizes China's rural areas”, http://en.people.cn/n3/2018/0314/c90000-9436981.html,
accessed July 2018.
9 Fung Business Intelligence Centre, “Rual E-Commerce in China: The Next Big Thing in the ‘Internet-Plus’ Era”,
https://www.fbicgroup.com/sites/default/files/Rural%20E-commerce%20in%20China-NOV.2015.pdf, accessed July 2018.
10 BBC, “China reveals ambitious broadband plan”, https://www.bbc.com/news/technology-32736199, accessed July 2018.
11South China Morning Post, “China to boost broadband speeds in rural areas to narrow education gap”,
https://www.scmp.com/tech/article/2133051/china-boost-broadband-speeds-rural-areas-narrow-education-gap, accessed
July 2018.
12 Global Times, “Eyeing untapped market, e-commerce giants focus on rural logistics”,
http://www.globaltimes.cn/content/988315.shtml, accessed July 2018.
13 The Wall Street Journal, “Alibaba, JD.com Target Rural China for E-Commerce Growth”,
https://www.wsj.com/articles/alibaba-jd-com-target-rural-china-for-e-commerce-growth-1440980597, accessed July 2018.
14 From an interview with Bill Wang. Translated from Chinese.
15 Leong, Carmen, Shan Pan, Sue Newell, and Lili Cui. "The Emergence of Self-Organizing E-Commerce Ecosystems in Remote
Villages of China: A Tale of Digital Empowerment for Rural Development." MIS Quarterly 40, no. 2 (2016): 475.
16 Forbes, “How EBay Failed In China”, https://www.forbes.com/sites/china/2010/09/12/how-ebay-failed-in-
china/#21c44bec5d57, accessed July 2018.
17 The Economist, “The Alibaba phenomenon”, https://www.economist.com/leaders/2013/03/23/the-alibaba-phenomenon,
accessed July 2018.
18Reuters, “Alibaba surges 38 percent on massive demand in market debut”, https://www.reuters.com/article/us-alibaba-
ipo/alibaba-surges-38-percent-on-massive-demand-in-market-debut-idUSKBN0HD2CO20140919, accessed July 2018.
19Bloomberg, “Alibaba’s Banks Boost IPO Size to Record of $25 Billion”, https://www.bloomberg.com/news/articles/2014-
09-22/alibaba-s-banks-said-to-increase-ipo-size-to-record-25-billion, accessed July 2018.
20 The Wall Street Journal, “Alibaba, JD.com Target Rural China for E-Commerce Growth”,
https://www.wsj.com/articles/alibaba-jd-com-target-rural-china-for-e-commerce-growth-1440980597, accessed July 2018.
21 China Daily, “Rural Taobao brings e-commerce to the countryside”, http://www.chinadaily.com.cn/china/2017-
12/03/content_35179379.htm, accessed July 2018.
22The Wall Street Journal, “Alibaba, JD.com Target Rural China for E-Commerce Growth”,
https://www.wsj.com/articles/alibaba-jd-com-target-rural-china-for-e-commerce-growth-1440980597, accessed July 2018.
23 Soho website (Chinese), “Liu Qiang Dong made a big entrance in the rural market—what do they see in the villages?” April
13, 2017, http://www.sohu.com/a/133709793_450537, accessed November 8, 2018.
24 Guancha website (Chinese), “How to do a good job in rural e-commerce”,
https://www.guancha.cn/economy/2015_11_09_340651.shtml, accessed July 2018.
25 Taozhexue website (Chinese), “What is the rural Taobao purchasing commission ratio?”,
http://www.taozhexue.com/wanggoujq/10483.html, accessed July 2018.
26 Couture, Faber, Gu, and Liu. E-Commerce Integration and Economic Development: Evidence from China. 2018.
http://www.nber.org/papers/w24384, accessed July 2018.
27 According to the company.
28 Sina Website (Chinese), “I thought that rural Taobao only sells goods? Now Ali wants to completely transform the
countryside”, http://tech.sina.com.cn/i/2016-08-15/doc-ifxuxnah3498239.shtml, accessed July 2018.
29 Alibaba Research Report, “Inclusive Growth and E-commerce: China’s Experience”, https://www.alizila.com/wp-
content/uploads/2017/04/AliResearchReportApril2017.pdf, accessed July 2018.
30 From the company’s annual reports.
31 Yu Xueyi, “Why I Quit Alibaba’s Big Push Toward Countryside Commerce”, http://www.sixthtone.com/news/2031/why-
i-quit-alibabas-big-push-toward-countryside-commerce, accessed July 2018.
32 Sohu website (Chinese), “What is the Rural Taobao 2.0 project?”, http://www.sohu.com/a/124514832_589253, accessed
July 2018.
33 TechInAsia, “China hits roadblocks as it spends billions to help farmers sell online”, https://www.techinasia.com/china-
anti-poverty-rural-ecommerce, accessed July 2018.
34 Sohu website (Chinese), “What is the Rural Taobao 2.0 project?”, http://www.sohu.com/a/124514832_589253, accessed
July 2018.
35 From the company’s annual reports, conversations with the company, and company website (alizila.com).
36 Couture, Victor, et al. E-Commerce Integration and Economic Development: Evidence from China. No. w24384. National Bureau of
Economic Research, 2018.
37 TechInAsia, “China hits roadblocks as it spends billions to help farmers sell online”, https://www.techinasia.com/china-
anti-poverty-rural-ecommerce, accessed July 2018.
38 China Daily, “China's personal income rises 6.3% in 2016”, http://www.chinadaily.com.cn/business/2017-
01/20/content_28010029.htm, accessed July 2018.
39 Yu Xueyi, “Why I Quit Alibaba’s Big Push Toward Countryside Commerce”, http://www.sixthtone.com/news/2031/why-
i-quit-alibabasbig-push-toward-countryside-commerce, accessed July 2018.
40 Analysys International Enfodesk, “Q2 2017 China B2C Retail Ecommerce Market Quarterly Report”
41 Tencent, “JD.com and Tencent form strategic partnership to transform eCommerce industry in China”,
https://www.tencent.com/en-us/articles/1600181460107229.pdf, accessed July 2018.
42 The New Yorker, “How E-Commerce Is Transforming Rural China”,
https://www.newyorker.com/magazine/2018/07/23/how-e-commerce-is-transforming-rural-china, accessed July 2018.
43Business Insider, “One of China's biggest online retailers plans to build nearly 200 drone airports to bring e-commerce to
rural China”, https://www.businessinsider.com/chinese-online-retailer-is-building-200-drone-airports-rural-china-2017-12,
accessed July 2018.
44South China Morning Post, “Late to the race, Chinese retailer JD.com sees artificial intelligence as central to its expansion”,
https://www.scmp.com/tech/e-commerce/article/2132141/late-race-chinese-retailer-jdcom-sees-artificial-intelligence,
accessed July 2018.
45 China Daily, “How has e-commerce changed life in rural China?”, http://www.chinadaily.com.cn/business/2017-
07/10/content_30060045.htm, accessed July 2018.
46 TechCrunch, “https://techcrunch.com/2018/07/26/the-incredible-rise-of-pinduoduo/”,
https://techcrunch.com/2018/07/26/the-incredible-rise-of-pinduoduo/, accessed July 2018.
47 Ibid.
48 Ibid.
49 Alibaba research, “Rural Taobao to expand to one thousand counties”, https://www.alizila.com/rural-taobao-to-expand-to-
a-thousand-counties/, accessed July 2018.